“What is a real estate syndication?” is a question our firm is asked often. Maybe you’re a developer, a real estate investor, or someone looking to expand your business by taking in outside investors to fund a larger project that you wouldn’t be able to do by yourself. Or maybe a friend or acquaintance has approached you about investing passively in his real estate deal that he’s organizing with other investors.
Whatever your role is in the above transaction, you would be taking part in a real estate syndication. In the simplest terms, a syndication is the structure or relationship between multiple investors who pool money together to fund a project, real estate or otherwise. Investing in a real estate syndication is essentially investing in a real estate enterprise as a passive investor alongside multiple other investors.
What kinds of projects can be syndicated?
Theoretically, one can syndicate any type of real estate project, be it debt, equity, raw land, or even single-family residential property. Most projects that are syndicated, however, tend to be larger commercial projects, such as multi-family apartment complexes, office space, retail, or industrial buildings. Syndication allows a person to acquire properties that are often worth more than what that single person would otherwise be able to afford.
Who can invest in a syndication?
Federal and state securities laws typically apply to real estate syndication transactions. Normally, securities may only be sold if the securities are registered with the SEC or otherwise exempt. Traditionally, most real estate syndications offerings have taken the form of a private placement exemption under Regulation D (Reg D). In 2014, there were 33,429 Reg D offerings that raised some $1.3 trillion. 99% of those offerings were raised under Regulation D’s Rule 506 exemption.
Reg D has 3 exemptions, each of which requires the investors to be either an accredited investor or a sophisticated investor. The most commonly used Reg D exemption is Rule 506(b)—formerly known simply as Rule 506 prior to 2013. Reg D allows a company to raise unlimited funds from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.
An accredited investor is someone with an annual income of at least $200,000 (or $300,000 if filing taxes jointly) for the last 2 calendar years, or someone with a net worth over $1 Million, excluding their primary residence. A sophisticated investor is someone the issuer/sponsor (the person organizing the syndication) believes is knowledgeable and experienced with financial and business matters, but is not accredited.
With the passage of the JOBS Act in 2012 and the creation of several new “crowdfunding” exemptions, non-accredited investors (i.e. everyone else) can now invest in certain syndications. However, many of the “crowdfunding” exemptions have restrictions that do not make them appealing to real estate syndications (e.g. a lower cap on the total amount you can raise, limitations on how much a single person can invest, etc.) which is why there are not as many real estate syndications open to the general public.
If you’re an accredited investor you can invest in any real estate syndication. If you are experienced with financial/business matters and have a prior relationship with a sponsor, then you can invest in real estate syndications organized by that sponsor with which you have a prior relationship or real estate syndications open to the public. If you’re neither an accredited investor nor a sophisticated investor, then you can only invest in syndications open to the public.
How does the sponsor/syndicator make money?
The sponsor (or syndicator) is the person who forms and organizes the group of investors and manages the investment. The sponsor typically charges investors certain fees during the initial set-up process and throughout the lifetime of the deal. These fees may include:
- an acquisition/organization or due diligence fee, often a flat percentage of the funds raised;
- asset management fees, for overseeing the project from beginning to end, which can take the form of a percent of gross revenue;
- disposition fees which are paid from the proceeds of the eventual sale of the property;
- refinance fees;
- property management fees (if the sponsor is managing the property too); and
- a share of profits if they take an ownership interest in the investment.
Is syndication right for you?
A syndication isn’t the best option for everyone. From a sponsor’s point of view, if you have a small project, you could probably raise funds from your friends and family and avoid some of the transaction costs involved in a syndication. From the investor’s side, if you’re not familiar with the inherent risks of investing in real estate and have never worked with a particular sponsor before, you might want to consider other safer investment options. Obviously the answer to this question will vary from person to person. If you’d like to discuss if a syndication is right for your particular project, feel free to give us a call today for a free consultation.